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TITLE UPDATE 2013, SELECTED ISSUES IN OIL, GAS AND MINERAL TITLE

MICHAEL S. BROWNING BURLESON LLP

112 E. PECAN STREET, SUITE 700 SAN ANTONIO, TEXAS 78205

Phone: 210.870.2604 Fax: 210.870.2626

Website: www.burlesonllp.com E-mail: [email protected]

HOUSTON BAR ASSOCIATION Oil, Gas and Mineral Law Section

October 22, 2013

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BIOGRAPHY Michael S. Browning Admitted to Bar: 2003, Texas. Board Certified: Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. Fellow of the College of the State Bar of Texas. Practice Areas: Oil and Gas Law; Oil and Gas Title. Experience: Micheal S. Browning is a Partner with Burleson LLP, a full-service law firm representing the energy industry in mergers, acquisitions, contract construction, securities, antitrust, class action, employment, and high risk commercial litigation, in addition to excellent title work. Burleson LLP maintains offices in Houston, San Antonio, Midland, Pittsburg, and Denver. Michael is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization and exclusively practices oil, gas and mineral law. Michael has rendered numerous title opinions, including drilling title opinions, division order title opinions, leasehold title opinions, and acquisition title opinions, throughout the State of Texas, including the Permian Basin, South Texas, the Texas Gulf Coast, and the Haynesville, Barnett, and Eagle Ford shale plays. He has advised clients on oil, gas and mineral title issues, pooling and unitization, community leases, undivided mineral ownership, and leasehold estates. Michael has prepared oil and gas leases, amendments, assignments, ratifications, mineral and royalty deeds, and operating agreements as well as represented clients in receivership litigation. Education: Texas A&M University Kingsville (B.A. Honors, 1995). South Texas College of Law (J.D., 2002). Professional: Board Certified, Oil, Gas and Mineral Law by the Texas Board of Legal Specialization since 2009; Rising Star 2011, San Antonio Lawyer Magazine; State Bar of Texas (Oil, Gas and Energy Resources Section); College of State Bar of Texas since 2009; San Antonio Bar Association (Natural Resources Section); American Association of Professional Landmen; Permian Basin Landman’s Association; San Antonio Association of Professional Landmen; and Delta Theta Phi – a National Legal Fraternity.

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Publications/Presentations: Community Leases and Selected Issues Arising Therefrom, presented at the Permian Basin Landman Association’s Annual Spring Seminar on April 23, 2013. "So You Want to Be an Oil and Gas Lawyer?", co-authored with Donald Hueske, Texas Lawyer, July 16, 2012. Basics of Oil, Gas, And Mineral Title From Runsheets to Common Pitfalls, presented at ConocoPhillips In-house Continuing Legal Education Seminar on May 3, 2012. Title Research and Selected Problematic Areas In Oil, Gas And Mineral Title, presented at the: San Antonio Association of Professional Landmen Midwinter Seminar on February 21, 2009; the Houston Association of Professional Landmen Spring Seminar on May 7, 2011; the Houston Bar Association on November 15, 2011; and the North Houston Association of Professional Landmen Half-day Seminar on February 15, 2012.

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TABLE OF CONTENTS ROYALTY DEED INTEPRETATION 6

Why All the Confusion in the First Place? 6 Fractional Royalty. 7 Fraction of Royalty. 7

Can There Be a Hybrid of a Fractional 8 Royalty and a Royalty Fraction?

Double Fractions. 9 Mineral/Royalty Distinction. 10

Is It Possible To Have the Hybrid 13 Characteristics of a Fractional Royalty Coupled With Some Mineral Fee Attributes?

VENDOR’S LIENS v. DEEDS OF TRUST 15 Hypothetical Scenarios. 15

Issue. 16 Applicable Law. 16 Relevance to Title. 17 COMMUNITY LEASES 18 What is a Community Lease? 18 Non-executive Interests and Community Leases? 18

What if my Lease contains an “anti-entireties” 20 clause or “anti-communitization” clause?

Who Would Bear Any “Excess” Royalty? 21

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ALLOCATION WELLS 23

What is an Allocation Well? 23

Horizontal Wells. 23

The Evolution of the Texas Railroad Commission 24 Rules Leading to Allocation Wells.

Scenarios for Allocation Well Use and the 25 Applicable Case Law Pertaining to Production Allocation in Application Wells.

Possible Allocation Calculation Methods. 27 Confusion of Goods. 29

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ROYALTY DEED INTERPRETAION The interpretation of instruments conveying or reserving royalty fractional interests remains an area ripe with confusion, consternation, debate, and litigation for landmen, title examiners, and mineral/royalty owners. While royalty fractional interests can be created by a plethora of linguistic variations, they can be classified into just two (2) types of fractional interests, a “royalty fraction” and a “fraction of royalty”. A distinction between a “royalty fraction” and a “fraction of royalty” simply must be made. When dealing with the quantum of royalty to be conveyed or reserved, the word “of” has the same mathematical effect that fractions multiplied against each other have. Simply put, the interest is reduced. A “fraction of royalty” might be expressed as “1/2 of 1/8 royalty”, which equals a one-sixteenth (1/16) royalty. A “royalty fraction”, on the other hand, might be expressed in terms such as “an undivided one-thirty second (1/32) royalty.” Thus, an undivided one-sixty forth (1/64) royalty is simply that, a one-sixty forth (1/64) of production. Conversely, a “1/64 of royalty” is a fraction reduced by the royalty reserved in and oil and gas lease; i.e., 1/64 of 1/8 or a 1/512. Why All the Confusion in the First Place? Although the effects of a fractional royalty versus a fraction of royalty are quite different, it is often difficult to determine which interest is actually being conveyed or reserved. There has been a great deal of litigation on this subject, much of which has arisen out of conveyances/reservations drafted prior to the 1970s during a period when it was generally assumed that the royalty provided for in an oil and gas lease would never be anything different from one-eighth (1/8). A right to “1/4 of royalty” was essentially synonymous with a right to one-fourth (1/4) of the one-eighth (1/8) royalty reserved in an oil and gas lease for conveyances/reservations drafted prior to the 1970s. Each clause would be construed to cover a one-thirty second (1/32) royalty. For fifty or more years, a one-eighth (1/8) oil and gas lease royalty was the typical royalty, and few people probably ever contemplated that the one-eighth (1/8) oil and gas lease royalty would ever change. See Smith, Earnest E., “Conveyancing Problems”, State Bar of Texas Advanced Oil, Gas and Mineral Law Course, October, 1981.

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Fractional Royalty The conveyance/reservation of a fractional royalty is the conveyance/reservation of a fraction or percentage of gross production as a free royalty. The owner of such an interest is entitled to a specific share of gross production, free of cost in an amount determined by the fractional size of his interest. The share of production to which such an owner is entitled will not “float” with royalties of differing amounts reserved in oil and gas leases. A fractional royalty interest can be created by a conveyance/reservation in a variety of terms and phrases, some examples of which are as follows: (1) “an undivided 1/16 royalty interest of any oil, gas, or

minerals that may hereafter be produced”. Masterson v. Gulf Oil Co., 301 S.W.2d 486 (Tex. Civ. App. —Galveston 1957, writ ref’d n.r.e.);

(2) “a fee royalty of 1/32 of the oil and gas”. Caraway v. Owens,

254 S.W.2d 425 (Tex. Civ. App. —Texarkana 1953, writ ref’d); (3) “an undivided 1/24 of all the oil, gas, and other minerals

produced, saved, and made available for market”. Miller v. Speed, 248 S.W.2d 250 (Tex. Civ. App. —Eastland 1952, no writ);

(4) “a 1/4 royalty in all oil, gas, and other minerals in and

under, and hereinafter produced”. Arnold v. Ashbel Smith Land Co., 307 S.W.2d 818 (Tex. Civ. App. —Houston 1957, writ ref’d n.r.e.);

(5) “1/8 of the usual 1/8 royalty interest”. Allen v. Creighton 131

S.W.2d 47 (Tex. Civ. App. —Beaumont 1939, error ref’d). Fraction of Royalty Unlike a fractional royalty interest, the quantum of production associated with a fraction of royalty will “float”, depending upon the royalty reserved in an oil and gas lease. A conveyance/reservation of a fraction of royalty creates a share in production in the amount of the fraction multiplied by the royalty reserved in an oil and gas lease. A royalty interest which is a fraction of royalty can be created by a variety of granting or reservation clauses, including but not limited to the following:

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(A) “1/16 of all oil and gas royalty”; (B) “an undivided one-half interest in and to all of the royalty”.

State Natl. Bank of Corpus Christi v. Morgan, 143 S.W.2d 757 (Tex. Com. App. 1940, opinion adopted);

(C) “1/2 of 1/8 of the oil, gas and other mineral royalty that may

be produced”. Harriss v. Ritter, 279 S.W.2d 845 (1955). There are several differences between a fractional royalty and a fraction of royalty. A small variation in the words of conveyance/reservation can cause a dramatic effect as to what the owner is entitled. In the examples set forth above, the share of production to which each respective owner is entitled, will depend upon the actual royalty reserved in the oil and gas lease. If we assume an oil and gas lease providing for a one-fourth (1/4) royalty, examples (A) and (C) will entitle the owner to one (1) out of every sixty-four (64) barrels produced, and example (B) will entitle the owner to one (1) out of every eight (8) barrels produced. However, if we assume a royalty of one-eighth (1/8) in the underlying oil and gas lease, the owners of the interests described in examples (A) and (C) will be entitled to only one (1) out of every one hundred twenty-eight (128) barrels of production, and the owner of the interest set forth in example (B) will be entitled to one (1) out of every sixteen barrels of production. To further illustrate this point, the following examples assume that the underlying oil and gas lease provides for a one-eighth (1/8) Lessor’s royalty: 1. “An undivided 1/16 royalty interest” entitles the owner to one

(1) out of every sixteen (1/16) barrels of production; 2. “An undivided 1/16 interest in and to royalty” entitles the

owner to one (1) out of every one hundred and twenty-eight (128) barrels produced;

3. “An undivided 1/2 interest in and to royalty” entitles the

owner to one (1) out of every sixteen (16) barrels of production. Williams & Meyers, Oil and Gas Law, Section 327.2.

Can There Be a Hybrid of a Fraction of Royalty and a Royalty Fraction? One of the few instances where the share of production attributable to a fractional royalty interest would “float” with the royalty reserved in an oil and gas lease occurs where a mineral interest owner first executes an oil and gas lease providing for a royalty,

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such as one-eighth (1/8), and then subsequently conveys a larger fractional interest such as a perpetual undivided one-fourth (1/4) royalty in all oil and gas and other minerals thereafter produced. There, the grantee of the fractional royalty would only be entitled to the proceeds from production up to the royalty provided in the current oil and gas lease since the lease was granted prior to the creation of his fractional royalty interest. The fractional royalty interest owner in this example would probably have a claim for breach of warranty against the grantor, and once the underlying lease expired, the fractional royalty interest owner would be entitled to the full 1/4 of gross production. Generally, however, the quantum of production received by a fractional royalty interest owner is independent of any royalty provided in an oil and gas lease. Double Fractions The granting or reserving of a fraction of royalty becomes even more complex when double fractions are utilized, i.e. “1/4 of 1/8 of all royalty…”. Texas cases are generally uniform in holding that such instruments are not ambiguous and convey exactly the quantity of production described. Indeed, most courts follow the “multiplication approach” when interpreting instruments with double fractions, to wit: A. Tiller v. Tiller, 685 S.W.2d 456 (Tex. App. --Austin 1985, no

writ) (holding that an instrument with the double fraction, 1/9 of 1/8, conveyed a 1/72 interest);

B. Helms v. Guthrie, 573 S.W.2d 855 (Tex. Civ. App. --Fort Worth 1978, writ ref'd n.r.e.) (holding that an instrument, which recited an interest as “1/2 of a 1/8 royalty”, is the same as 1/16 of the total production);

C. Harriss v. Ritter, 279 S.W.2d 845 (1955) (holding that a reservation of “1/2 of 1/8 of the oil, gas and other mineral royalty” reserved a 1/16 “of the royalty,” rather than a 1/2 “of royalty”);

D. Allen v. Creighton, 131 S.W.2d 47 (Tex. Civ. App. --Beaumont 1939, error ref'd) (holding that a conveyance of “1/8 of the usual 1/8 royalty” conveyed a right to 1/64 of production);

E. Richardson v. Hart, 185 S.W.2d 563 (1945), (holding the grant of “1/16 of 1/8 of all of the oil royalty” created a fraction of royalty equal to 1/128 “of the royalty”).

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In nearly all the cases in which double fractions are encountered, the second fraction is one-eighth (1/8), leading one to believe that the use of double fractions in conveyances which have been interpreted by the courts leads to a result which was not intended by the parties. For instance, the oil and gas lease in Richardson v. Hart provided for a one-eight (1/8) royalty resulting in the grantees receiving an undivided 1/1024 interest in gross production. This strict doctrine of construction was relied upon and expanded further in Harriss v. Ritter, in which an instrument reserving: (i) 1/2 of 1/8 of the oil, gas, and other mineral royalty; and (ii) 1/2 of bonus and rentals, was held to reserve a royalty of 1/16 of royalty, together with 1/2 of bonus and rentals. It is doubtful that in the Harriss case that the parties intended to distinguish the various lease benefits by reserving different fractional interests in each. It appears that in these cases, the policy considerations of certainty of title have won out over more liberal rules of construction which would give more weight to the probable intent of the parties. As a practical matter, there is little explanation, other than mistake, for the use of double fractions, especially when the second fraction is one-eighth (1/8). If the use of double fractions was a mistake, it is likely that the parties’ only remedy will be that of reformation, since, as a matter of construction, the instrument will likely be deemed to be unambiguous. Of course, the likelihood of deed reformation or of obtaining a Stipulation of Interest between the parties may be minimal. Mineral/Royalty Distinction Although this portion of the paper is titled and dedicated to Royalty Deed Interpretation, it would be remiss not to discuss some interpretive issues surrounding whether an interest is “mineral” in nature or “royalty” in nature. The rights and appurtenances comprising the mineral estate are listed in, Altman v. Blake 712 S.W.2d 117 (Tex. 1986), holding that a mineral estate consists of the following five rights: (1) the right to develop (the right of ingress and egress); (2) the right to lease (the executive right); (3) the right to receive bonus payments; (4) the right to receive delay rentals; and (5) the right to receive royalty payments. While each right is distinct in and of itself, the nature of the mineral estate changes when the five (5) Altman attributes are variously combined.

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Interpretive problems have arisen in the construction of instruments that convey or reserve a specified fraction of the oil, gas and minerals in and under a tract in a fashion consistent with a “mineral conveyance” but subsequently include limiting language or reservations to strip the mineral interest of some or all of the usual attributes of the mineral estate; usually the right to execute oil and gas leases (the executive right) as well as the right to receive bonus payments and delay rentals. This raises the question of whether a mineral interest denuded of most or all of bundle of sticks comprising the mineral estate, except the right to receive royalty, remains mineral in nature so that the owner’s royalty is calculated as a fraction of royalty, or has this mineral interest been transformed to a “royalty” interest so that the owner’s royalty is calculated as a royalty fraction? A look at the historical treatment of this phenomenon is helpful but by no means conclusive. Some examples include the following: 1. In Watkins v. Slaughter, 189 S.W.2d 699 (1945), the instrument

in question reserved to the grantor a 1/16 interest in and to all of the oil, gas and other minerals in and under and that may be produced from the land but provided that the grantee would have the right to execute leases and to receive all bonus and delay rentals. However, the grantor would, “receive the royalty retained herein only from actual production.” [emphasis added]. The Watkins Court held the retained interest was a 1/16 royalty fraction.

2. In Grissom v. Guetersloh, 391 S.W.2d 167 (Tex. Civ. App. —Amarillo 1965, writ ref'd n.r.e.) the instrument in question reserved to the grantor an undivided 1/16 of all the oil, gas and minerals in and under “…But the grantors waive all interest in and to all rentals or other consideration which may be paid to grantees for any oil and gas lease on the land or any part thereof hereby conveyed.” The Grissom Court held that the reserved interest was stripped of the executive right, the right to bonus, and the right to delay rentals. However, the Court declined to interpret the reserved interest as a royalty fraction but held same to be a fraction of royalty.

3. In Altman v. Blake, 712 S.W.2d 117 (Tex. 1986) the Court construed a grant of, “An undivided one-sixteenth (1/16) interest in and to all of the oil, gas and other minerals in and under and that may be produced…But does not participate in any rentals or leases…” The Altman Court held that a mineral interest shorn of the executive right and the right to receive delay rentals remains an interest in the mineral fee. Thus the grantee would be entitled to a 1/16 fraction of royalty.

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4. In French v. Chevron U.S.A. Inc., 896 S.W.2d 795 (Tex. 1995)

the granting clause created a mineral interest but subsequent language indicated the mineral grantee would have no executive rights, would receive no bonus, would receive no delay rentals and that “this conveyance is a royalty interest only.” The French Court held that the mineral nature of the granting clause was not transformed by the subsequent stripping away of other mineral attributes except for royalty. Further, the French Court reasoned that if the parties had intended a royalty conveyance, mentioning leasing, bonus, and delay rentals would have been redundant. Moreover, the identification of the conveyed interest as a “royalty interest only” was not persuasive to the Court, which mentioned that the Court of Appeals distinguished Watkins v. Slaughter on the basis that the French Deed did not provide for the grantee to receive the interest out of “actual production.” French at 797. The result was that the grantee received a fraction of royalty.

5. In Temple-Inland Forest Products Corp. v. Henderson Family Partnership, Ltd, 958 S.W.2d 183 (Tex. 1997) the two (2) instruments at issue each granted an undivided 15/16 interest in the oil, gas and minerals in and under and that may be produced from the tracts covered. However, the instruments further provided that the undivided one-sixteenth (1/16th) interest in the oil, gas and other minerals retained and reserved by the Grantor: shall always be a royalty interest; would not bear any of the cost of exploration, development and production; and that Grantor’s one-sixteenth (1/16) royalty interest shall be delivered free of cost. Considering the language of the instrument in its entirety, particularly the number of times the instrument referred to the reserved interest as a royalty as well as the fact that the retained interest was free of cost, the Temple-Inland Court held that the reserved royalty interest was a 1/16 royalty fraction.

As to what guidance the above line of cases provides, it can reasonably be said that: I. A conveyance/reservation of a mineral interest stripped of all

of its components other than the right to receive royalty remains mineral in nature resulting the grantor/grantee receiving a fraction of royalty instead of a royalty fraction; and;

II. Stripping away all of the components of the mineral estate in a conveyance/reservation coupled with some additional distinguishing factor (multiple reference to the word “royalty”, reference to “actual production”, reference to the

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interest being “free of cost”) can result in the transformation of a conveyance/reservation from being mineral in nature to that of a royalty fraction.

However, as a practical matter, the cautious examiner will not presume to know which kind of interest an instrument creates unless the language is unequivocal or nearly identical to one of the instruments decided in the above cases. Is It Possible To Have The Hybrid Characteristics of a Fractional Royalty Coupled With Some Mineral Fee Attributes? Courts have shown a willingness to interpret an instrument as having hybrid characteristics containing a conveyance/reservation of a fractional royalty interest along with some other attributes of the mineral estate. As such, it is possible to attach such mineral rights to a fractional royalty without transforming such fractional royalty into a fraction of royalty. In Elick v. Champlin Petroleum Co., 697 S.W.2d 1 (Tex. App. —Houston [14th Dist.] 1985, writ ref’d n.r.e.) the Court addressed an instrument with the following reservation:

“SAVE AND EXCEPT an undivided 1/32 royalty interest in and to all of the oil, gas and other minerals in, to and under and that may be produced from the land herein conveyed to be paid or delivered unto said J.J. Elick, his heirs, or assigns, as his own property free of cost… It is further expressly agreed and understood that the said J.J. Elick, his heirs or assigns shall participate in one-half of the bonus paid for any oil, gas or other mineral lease covering said land and shall participate in one-half of the money rentals which may be paid to extend the time within which a well may be begun under the terms of any lease covering said land and said J.J. Elick, his heirs or assigns shall join in the execution of any future oil, gas or mineral lease.” [emphasis added].

The Elick Court concluded that the interest reserved was simply a combination of diverse components of the mineral estate, resulting in ownership of a one-thirty second (1/32) royalty fraction, coupled with a right to receive one-half (1/2) of all bonuses and rentals, together with the power to join in execution of leases in order to protect the grantor’s interest in bonus and rents which might be paid thereunder.

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More recently, the Corpus Christi Court of Appeals in Wynne/Jackson Development v. PAC Capitol Holdings, Ltd., No. 13-12-00449-CV, 2013 WL 2470898 (Tex. Civ. App. —Corpus Christi, 2013, pet. denied) construed an instrument to have reserved a royalty fraction, coupled with the right to receive one-half (1/2) of the bonus and other payments, containing the following reservation, to wit:

“There is excepted herefrom and reserved unto Grantor a non-participating royalty of one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas, and other materials produced, saved and sold from the above-described property, provided, however, that although said reserved royalty is non-participating and Grantee shall own and possess all leasing rights in and to all oil, gas and other minerals, Grantor shall, nevertheless, have the right to receive one-half (1/2) of any bonus, overriding royalty interest, or other payments, similar or dissimilar, payable under the terms of any oil, gas and mineral lease covering the above-described property.” [emphasis added].

While the interpretation of the instrument in the Wynne/Jackson Development case appears consistent with relevant case law, the analysis utilized by the Court is troubling. The Court appears to rely on Harriss v. Ritter, 279 S.W.2d 845 (1955) when it found: “[T]he reservation is susceptible of but one interpretation." Id. The court held, “as a matter of law that the term ‘one-half of one-eighth of the oil, gas and other mineral royalty’ could have but one meaning and that is 1/16th of the royalty on all the oil, gas and other minerals that may be produced from said land.” Id. Again, this is consistent with the interest being a fractional royalty. Here, the only difference in the relevant language is that the words “the usual” are used to qualify the one-eighth royalty.” (Emphasis added) Wynne/Jackson Development at page 3. The Texas Supreme Court in Harriss v. Ritter held that the reservation of one-half of one-eighth (1/2 of 1/8) of the oil, gas and other mineral royalty yielded a one-sixteenth (1/16) fraction of royalty as opposed to a fractional royalty. As such, it appears that the Court in the Wynne/Jackson Development case may have either misconstrued the holding in Harriss v. Ritter or was attempting to distinguish the Wynne/Jackson Development case from Harriss v. Ritter somehow. In any event, the analysis is unclear. Fortunately, the Wynne/Jackson Development case is an unpublished Opinion but the author felt it important to note the analytical inconsistency.

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VENDOR’S LIENS v. DEEDS OF TRUST Hypothetical Scenarios

Hypothetical No. 1 By Warranty Deed with Vendor’s Lien dated January 15, 1927, recorded in Volume 100, Page 111, Hazard County, Deed Records, John Smith conveys to Joseph Doe, 100 acres, A-1, hereinafter called “Blackacre”. Thereafter, by Mineral Deed dated February 20, 1928, recorded in Volume 125, Page 222, Hazard County, Deed Records, Joseph Doe conveys to ABC Minerals and undivided one-half (1/2) interest in the oil, gas and minerals in and under Blackacre. Subsequently, the original note to John Smith as memorialized in the Vendor’s Lien fell into default. Thereafter, by Deed in Lieu of Foreclosure, dated March 25, 1929, recorded in Volume 150, Page 333, Hazard County, Deed Records, Joseph Doe conveyed to John Smith Blackacre.

Hypothetical No. 2 By Warranty Deed with Vendor’s Lien dated January 15, 1927, recorded in Volume 100, Page 111, Hazard County, Deed Records, John Smith conveys to Joseph Doe, 100 acres, A-1, hereinafter called “Blackacre”. Also on January 15, 1927, Joseph Doe executed a Deed of Trust recorded in Volume 20, Page 50, Deed of Trust Records, Hazard County, in favor of First National Bank, N.A. securing payment of note with a final maturity date of July 10, 1991, and secured by Blackacre. Thereafter, by Mineral Deed dated February 20, 1928, recorded in Volume 125, Page 222, Hazard County, Deed Records, Joseph Doe conveys to ABC Minerals and undivided one-half (1/2) interest in the oil, gas and minerals in and under Blackacre.

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Subsequently, the original note to First National Bank, N.A. as memorialized in the Deed of Trust fell into default. Thereafter, by Deed in Lieu of Foreclosure, dated March 25, 1929, recorded in Volume 150, Page 333, Hazard County, Deed Records, Joseph Doe conveyed to First National Bank, N.A., Blackacre. Issue. The issue raised by these two (2) hypothetical scenarios is, “Does the conveyance of undivided one-half (1/2) interest in the oil, gas and minerals in and under Blackacre to ABC Minerals survive the Deed in Lieu of Foreclosure in either hypothetical?” Applicable Law. There is distinction between a vendee and a mortgagor. A mortgagor, as the owner of the legal estate, can convey legal title of mortgaged property. A foreclosure proceeding is required to divest the rights of the owner of a legal interest. Flag-Redfern Oil Co. v. Humble Exploration, Inc., 744 S.W.2d 6, 8 (citing Bradford v. Knowles, 25 S.W. 1117 (Tex. 1894). On the other hand, if a vendor's lien encumbers the land, legal title does not pass to the vendee. A vendee owns the equitable interest along with a contract for the purchase of land. Therefore, if the vendee sells all or part of the interest, the conveyance is actually a transfer of an equitable interest susceptible to rescission. Id. (citing Texas Osage Co-Op Royalty Pool v. Benz, 93 S.W.2d 196, 198 (Tex. Civ. App. --Texarkana 1935, writ dism'd.). Considering the foregoing, under Hypothetical No. 1, Joseph Doe owned only an equitable interest in and to Blackacre, and so when he conveyed same to ABC Minerals, all that ABC Minerals acquired in Blackacre was an equitable interest in and to an undivided one-half (1/2) interest in the oil, gas and minerals in and under Blackacre. In this scenario, default can lead to rescission of the contract. This [rescission of the contract] can be accomplished through foreclosure, or privately when the vendee executes a deed reconveying the property. Id. at 9. As such, under Hypothetical No. 1, the Deed in Lieu of Foreclosure extinguished the rights of ABC Minerals in and to undivided one-half (1/2) interest in the oil, gas and minerals in and under Blackacre.

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Conversely, under Hypothetical No. 2, Joseph Doe, as mortgagor, holds the legal estate to Blackacre, while First National Bank, N.A. holds only equitable title. ABC Minerals as an intervening purchaser of a legal interest is granted legal title which is superior to the mortgage although subject to the mortgagee's rights. Id. at 9. The Deed of Trust did not vest First National Bank, N.A. with title to Blackacre. As such, under Hypothetical No. 2, the Deed in Lieu of Foreclosure did not extinguish the rights of ABC Minerals in and to undivided one-half (1/2) interest in the oil, gas and minerals in and under Blackacre. Relevance to Title. The author has included this topic as for three (3) reasons: 1. Because this point of law turns on a fine distinction which

could easily be missed by the unwary;

2. Because a recent case with similar issues was recently handed down, See Glenn v. Lucas, 376 S.W.3d 268 (Tex. App. -Texarkana 2012); and

3. Perhaps most important, is that many of the runsheets upon which title is based routinely leave off old Releases of Vendor’s Liens, old Deeds of Trust, and other similar instruments which again, could cause this issue to be missed by the unwary, or might lead to unneeded requirements.

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COMMUNITY LEASES What is a Community Lease? A Community Lease is created when separately owned tracts of land are included by the executive rights owners in a single oil and gas lease. These separate tracts and all mineral and royalty interests within them are treated as pooled, on a surface acreage basis, for the duration of the lease as a matter of law, in the absence of an express provision to the contrary. Parker v. Parker, 144 S.W.2d 303 (Tex. Civ. App. --Galveston 1940, writ ref’d); French v. George, 159 S.W.2d 566 (Tex. Civ. App. --Amarillo 1942, writ ref’d); Southland Royalty Co. v. Humble Oil and Refining Co., 249 S.W.2d 914 (1952). Non-Executive Interests and Community Leases. Considering the far reaching ramifications surrounding Texas law concerning pooling of non-executive interests it is a prerequisite to review the historical basis for such law. In this respect, it is probably safe to say that the nightmares experienced by Texas executives rights owners, Lessees and title examiners in connection with Community Leases had their genesis in the Texas Supreme Court’s 1943 decision in Brown v. Smith, 174 S.W.2d 43 (1943). See Lynch “Problems Caused By Nonexecutive Interests Under Multi-Tract Leases: Brown v. Smith to London v. Merriman” State Bar Section Report Section 12-1990. Specifically, the Brown Court held that despite the fact that the Blackacre executive had dedicated Blackacre to a Community Lease, and further despite the fact that such lease contained a provision purporting to pool royalty interests in Blackacre and Whiteacre, the non-participating royalty interest produced and saved from Blackacre was not pooled. See Lynch “Problems Caused By Nonexecutive Interests Under Multi-Tract Leases: Brown v. Smith to London v. Merriman” State Bar Section Report Section 12-1990. Basically, the Brown Court’s holding directed that while executives in Texas are allowed to unilaterally determine lease terms pertaining to such important matters as: (1) bonus; (2) delay rental; (3) drilling obligations; (4) shut-in royalty; (5) length of the primary term; and (arguably most important to the non-executive) (6) the quantum of royalty to be paid. To be sure, these matters may directly impact the economics of the non-executive interest, however, the executive is nonetheless precluded from pooling the non-executive’s interest. Id.

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By denying the executive the authority to pool the interest of his non-executive, the Texas Supreme Court in Brown set the stage for a series of ratification decisions which afford the non-executive the best of all possible worlds. More specifically, Texas courts since Brown have given a non-executive whose interest has been made subject to an Oil and Gas Lease which purports to pool such interest an option; he/she can either ratify the pooling provision and secure the benefits thereof or not, depending on which alternative best suits him/her. Id. In Montgomery v. Rittersbacher, 424 S.W.2d 210, (Tex. 1968), the Texas Supreme Court held that pooling or apportionment of royalties provided for in a multi-tract lease, in which some tracts, but not all, were burdened by a non-executive interest, gives rise to an “implied offer” in favor of the non-executive to apportion royalties if he so desires. The Montgomery Court further held that the non-executive may accept the “offer” by ratifying the lease, and that such ratification can be accomplished by filing suit to collect a share of the apportioned royalty benefits accruing under the lease. Montgomery at 214. The unauthorized pooling complained of in Montgomery occurred under an Entireties Clause providing that all royalty accruing under the subject multi-tract Oil and Gas Lease was to be treated as an entirety, to be divided among and paid to the separate owners in the proportion that the acreage owned by each bore to the entire leased acreage. The Montgomery Court held that the entireties clause is “virtually indistinguishable” from a pooling clause in that both “change the aggregate ownership of the [nonexecutive]…and, in effect, would allow the owner of the executive rights to either diminish or enlarge the ownership of [such nonexecutive].” This being the case, said the Montgomery Court, the consent of the nonexecutive to apportionment of royalties under an entireties clause must be obtained just as it must where the apportionment is effected under a pooling clause. Where the Lessors/Executive Rights owners are authorized to commit, the tracts, and all mineral and royalty interest within such tracts, the act (in other words, upon the execution thereof) of granting a community lease with respect to the separately owned tracts, results by implication as a matter of law in the pooling of the mineral and royalty interests in those tracts. However, such pooling by a community lease cannot be effective as to a non-participating royalty owner(s) without the joinder or consent of the owner of such non-participating interest. Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968). [emphasis added].

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The “implied offer to pool” under Montgomery places the non-executive interest owner in the “driver’s seat” when deciding to ratify the Community Lease or not. To illustrate by example, a one-half (1/2) of the royalty NPRI owner produced and saved from 20 acre tract is included in a 100 acre Community Lease. If it appears that for whatever reason no Well will be drilled on the 20 acre tract, the NPRI owner will want to ratify the Community Lease in order to obtain a share of the production. On the other hand, if it appears that a Well will be drilled on his specific 20 acre tract, the NPRI owner will likely not ratify because then his interest in production would be diluted. See Lynch “Problems Caused By Nonexecutive Interests Under Multi-Tract Leases: Brown v. Smith to London v. Merriman” State Bar Section Report Section 12-1990 at 3. What if my Lease contains an “anti-entireties” clause or “anti-communitization” clause? Many Texas Oil and Gas Leases contain “anti-entireties” clauses or “anti-communitization” clauses similar to:

If this lease now or hereafter covers separate tracts, no pooling or unitization of royalty interests as between any such tracts is intended or shall be implied or result merely from inclusion of such separate tracts within this Lease, but lessee shall nevertheless have the right to pool or unitize as provided above, with consequent allocation of production as provided above. As used in this paragraph, the words, “separate tract” mean any tract with royalty ownership differing, now or hereafter, either as to parties or amounts, from that as to any other part of the leased premises.

In Verble v. Coffman, 680 S.W.2d 69 (Tex. App. -–Austin 1984, no writ) and in London v. Merriman, 756 S.W.2d 736 (Tex. App. -–Corpus Christi 1988, writ denied) both Courts allowed a non-executive whose interest had been dedicated to a multi-tract Oil and Gas Lease to share in benefits accruing to other lease tracts irrespective of the fact that in both cases: 1. There had been no actual pooling of the non-executive’s tract,

either with other tracts covered by the Oil and Gas Lease or with external acreage; and

2. The executive rights owners and their Lessee had inserted an “anti-entireties” clauses or “anti-communitization” clauses in

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the Oil and Gas Leases expressly providing that there was to be no apportionment of royalties among the separate tracts. See Lynch “Problems Caused By Nonexecutive Interests Under Multi-Tract Leases: Brown v. Smith to London v. Merriman” State Bar Section Report Section 12-1990 at 4.

The holdings in Verble and London reveal that Texas courts do not favor “anti-entireties” clauses or “anti-communitization” clauses. Texas courts have suggested that anti-communitization can be obtained by expressly excluding the mineral estate of the “other” interest owners from the lease or by executing separate leases with regard to the tracts involved. See Standard Oil Company v. Donald, 321 S.W.2d 602, 606 (Tex. Civ. App. -–Fort Worth 1959, writ ref’d n.r.e.). To be sure, there is substantial doubt as to whether anti-communitization may be achieved by relying on creative drafting measures in an Oil and Gas Lease because it may very well be that the holder of the executive right is precluded from excluding the non-executive’s interest from a pooled unit without the non-executive’s consent, failing which the executive may be exposed to liability. See Smith, “Implications of a Fiduciary Standard of Conduct for the Holder of the Executive Right”, 64 Tex. L. Rev. 371 (1985). Who Would Bear Any “Excess” Royalty? “Excess” royalty may be described in a scenario when a non-executive in a non-drillsite tract ratifies the underlying Oil and Gas Lease, thus apportioning (albeit constructively) royalties across intra-lease tracts. Although there is very little case law addressing the issue of who is to bear any “excess” royalty the authority which does exist indicates that an “excess” royalty burden would fall on the executive. See MCZ, Inc. v. Triolo, 708 S.W.2d 49 (Tex. App. – Houston [1st Dist.] 1986, no writ). The Executive in MCZ argued strenuously that, the Lessee should bear the “excess” royalty burden because it failed to secure the non-executive’s ratification of the subject pooling and thus breached its duty to the Lessor/Executive to pool in good faith. However, the MCZ Court rejected that argument and held that absent bad faith on the part of the lessee, it is the Lessor/Executive who bears the “excess” royalty burden when non-executive interest owner elects to ratify the unauthorized pooling of his/her interest. MCZ at 56.

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The MCZ Court stressed the fact that the underlying Oil and Gas Lease contained both a proportionate reduction clause and a general warranty of title with no express exception being made for the non-executive’s interest. MCZ at 54. What the MCZ Court did not address and what remains an open area of law is a scenario in which an underlying Oil and Gas Lease does not contain a Warranty Clause and/or does not contain a Proportionate Reduction Clause. If an underlying Oil and Gas Lease did not contain a Warranty Clause but did include a Proportionate Reduction Clause, and in the event the non-executive interest owner(s) burden exceeds the Executive’s royalty share, the Lessee would likely have to absorb the difference given that a Proportionate Reduction Clause can only take the executive down to zero, and the Executive has no warranty exposure for the balance. (It is important to note that in MCZ, Inc. v. Triolo, the underlying Oil and Gas Lease contained a provision indicating that "[a]ll royalty covered by this lease, (whether or not owner by lessor) shall be paid out of the royalty herein provided." MCZ at 54.). Additionally, if an underlying Oil and Gas Lease did not contain a Warranty Clause AND did not include a Proportionate Reduction Clause, there is nothing in such underlying Oil and Gas Lease to shift the payment burden from the Lessee to the Lessor/Executive. Such a Lessee takes this underlying Oil and Gas Lease on whatever limited or burdened interest the Executive might have, while at the same time unqualifiedly agreeing to pay the Executive a certain share (not subject to reduction) of all benefits accruing to any one or more tracts included in the lease premises. See Lynch “Problems Caused By Nonexecutive Interests Under Multi-Tract Leases: Brown v. Smith to London v. Merriman” State Bar Section Report Section 12-1990 at 8.

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ALLOCATION WELLS What is an Allocation Well? An Allocation Well is a Texas Railroad Commission designation for a proposed horizontal well for which the operator does not have a Production Sharing Agreement or at least sixty-five percent (65%) of the working interest owners and royalty interest owners signed up for each included oil and gas lease and unit. Drafting Production Sharing Agreements, 39th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute, at 2, March 22, 2013, Robert D. Jowers and Mickey R. Olmstead. Horizontal Wells. The Texas Railroad Commission defines a horizontal drainhole well as “[a]ny well that is developed with one or more horizontal drainholes having a horizontal displacement of at least 100 feet.” 16 TEX. ADMIN CODE § 3.86(a)(4) (2000) (R.R. Comm’n of Tex., Horizontal Drainhole Wells). Horizontal drilling increases the exposure of the perforated (i.e. producing) portion of the wellbore by thousands of feet over a traditional vertical well. As such, the efficient gains in hydrocarbon extraction are exponential. In other words, as the amount of source rock exposed to the wellbore increases, production rates have skyrocketed from once hundreds of feet of productive formation exposed, to the thousands of feet of productive formation exposed today. Horizontal drilling, coupled with the continued refinement of drilling and completion techniques, allows operators to achieve far greater hydrocarbon recovery from a given field, and to develop previously unproducible hydrocarbon reserves trapped in shale rock and other tight geologic formations. Further, as lateral lengths for each well continue to increase, operators may now access more of a particular formation through fewer surface locations, including the ability to access areas otherwise impossible to reach. Indeed, this past decade has seen an unprecedented boom in horizontal drilling in Texas and throughout the United States. As with almost any new technological advancement, horizontal drilling presents its own unique set of legal and regulatory issues. To be sure, horizontal drilling has challenged the Texas Railroad Commission and the Texas Court system to apply and adapt traditional legal and regulatory concepts, which have been developed for over a century for vertical wells, to horizontal wells.

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The Evolution of the Texas Railroad Commission Rules Leading to Allocation Wells. Initially allowed as a means of maximizing production, the Texas Railroad Commission has issued permits based on Production Sharing Agreements. A Production Sharing Agreement (“PSA”) is an agreement between royalty, working and other mineral interest owners with interests in multiple pooled units and/or unpooled leases in which the parties agree to a method for allocating production from horizontal wells traversing these lands. See H. Phillip Whitworth & D. Davin McGinnis, Square Pegs, Round Holes: The Application and Evaluation of Traditional Legal and Regulatory Concepts for Horizontal Wells, 7 TEX. J. OIL, GAS & ENERGY L. 177, 210 (2011-2012). A timeline of the evolution of the Texas Railroad Commission Rules leading to Allocation Wells is as follows: 1. In 1998 the Texas Railroad Commission first established a

procedure for permitting vertical PSA wells drilled on or near lease-lines. Drafting Production Sharing Agreements, 39th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute, at 4, March 22, 2013, Robert D. Jowers and Mickey R. Olmstead. [emphasis added].

2. In 2006 the Texas Railroad Commission established a procedure for permitting horizontal PSA wells. Id. [emphasis added].

3. In 2007 the Texas Railroad Commission Staff denied a permit for a PSA well because it had less than 100% of the royalty interest owners signed up. Devon Energy Production Co., LP then appealed that denial to the Commissioners, who granted the well permit and indicated that the Staff was authorized to permit similarly situated wells. Id.

4. In 2008 the Texas Railroad Commission Staff denied a permit for a PSA well that had less than ninety percent (90%) royalty interest signed up. Devon appealed the denial to the Commissioners. The Texas Railroad Commission approved any PSA well permit where each tract has at least sixty-five (65%) working interest and royalty interest signed up. Id.

5. In 2010, after the Texas Railroad Commission denied Devon’s proposed field rule language in Oil & Gas Docket No. 06-0262000 and Devon’s Motion for Rehearing was denied, Devon filed a well permit application for an Allocation Well, the Taylor-Abney-Obanion Allocation Well. On April 21, 2010, the Texas Railroad Commission’s Director of the Hearing Section, Mr. Colin

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Lineberry, notified Devon that based on the representations that Devon holds leases on each of the tracts crossed by the proposed wellbore and that there are no unleased interests within 330 feet of any point on the wellbore, the Texas Railroad Commission would process the Drilling Permit. See Oil & Gas Docket No. 02-0278952 the Proposal for Decision and Recommended Final Order in the Application of EOG Resources, Inc., Klotzman Lease (Allocation) Well No. 1H, Eagleville (Eagle Ford -2) Field, DeWitt County, Texas. Despite no representation by Devon Energy that it had the agreement of at least sixty-five percent (65%) of the interest owners, the Texas Railroad Commission approved Devon’s Drilling Permit. Since that time, the Texas Railroad Commission has issued more than sixty (60) Allocation Well Permits, and has not required the previous minimum amount (sixty-five percent (65%)) of interest owners’ execution of Production Sharing Agreements.

Scenarios for Allocation Well Use and the Applicable Case Law Pertaining to Production Allocation in Allocation Wells. There are several scenarios in which an operator might need to utilize an Allocation Well or utilize a production allocation method as one would use for an Allocation Well, to wit: A. An operator, who owns 100% of the working interest in two (2)

or more adjacent tracts, desires to drill a horizontal well traversing and producing from each tract but the underlying oil and gas leases covering these tracts do not allow for pooling.

B. An operator, who owns 100% of the working interest in two (2) or more adjacent tracts, desires to drill a horizontal well traversing and producing from each tract but the pooling provisions of one or more of the underlying oil and gas leases covering these tracts has been maximized.

C. An operator who owns 100% of the working interest in two (2) or more adjacent tracts, desires to drill a horizontal well traversing and producing from each tract but one or more of these tracts contains an unleased/unpooled undivided mineral interest owner.

D. An operator who owns 100% of the working interest in two (2) or more adjacent tracts, desires to drill a horizontal well traversing and producing from each tract but one or more of these tracts contains an un-ratified non-executive interest owner.

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E. An operator who owns 100% of the working interest in two (2) of

three (3) tracts adjacent tracts, desires to drill a horizontal well traversing and producing from each tract but in the third tract such operator owns only a 50% working interest while the reaming 50% is owned by another operator whose interest is not pooled.

Unfortunately, there is scant legal authority to rely upon. The one case which supports the position that operators are entitled to cross lease lines without pooling the interests involved (“allocating”) and provides some guidance as to an operators obligations to allocate production is Browning Oil Co. v. Luecke, 38 S.W.3d 625 (Tex. App. —Austin 2000, pet. denied). In Luecke, the operator drilled two (2) horizontal wells that traversed tracts owned by the Lueckes, as well as several other tracts, and then purported to pool the Lueckes’ lands into Units that failed to comply with the Lueckes’ oil and gas lease anti-dilution clauses. The Lueckes contended that such pooling was ineffective as to them, thereby entitling them to royalties based upon all the production from the first well and royalties based on all the production from the second well. Id. The Luecke Court concluded that even though the reasonably prudent operator standard would support the Units formed, this implied covenant doctrine could not override the express provisions of the Lueckes’ oil and gas leases, thereby rendering the pooled units ineffective as to the Lueckes' lands. The Luecke Court further ruled that the Lueckes’ damages were not the royalties they would have received from a Unit complying with the pooling provisions, as the trial court had instructed. The Luecke Court declined to apply legal principles appropriate to vertical wells that are inappropriate to horizontal wells and would discourage the use of horizontal drilling. Instead, Luecke Court ruled that the Lueckes were entitled to royalties on the production that can be attributed to their tracts with reasonable probability. Id. A few of the relevant holdings from Browning Oil Co. v. Luecke are as follows: I. Each tract traversed by the horizontal wellbore is a drillsite

tract, and each production point on the wellbore is a drillsite. Browning Oil Co. v. Luecke at 634.

II. The measurable portion of a horizontal well lies between the initial penetration point and the terminus point. Id at 635.

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III. If a horizontal drainhole traverses and is producing from a tract with an unpooled/unleased interest owner, and such interest is not validly pooled, such unpooled interest owner is entitled to a share of production that can be attributed to their tract with reasonable probability. Id at 647. [emphasis added].

Procedurally, the Austin Court of Appeals remanded the Luecke case back to the trial court for a new trial on damages consistent with the Austin Court of Appeals’ Opinion. Thereafter, the parties settled the case. As such, the Luecke Opinion failed to address: A. What is “reasonable probability”?

B. Who has burden of proof?

C. What is the measure of damages if “reasonable probability”

cannot be ascertained? Possible Allocation Calculation Methods. With respect to the question of “What is the best methodology to satisfy the ‘reasonable probability’ standard set forth in Browning Oil Co. v. Luecke?”, the short answer is that no one really knows. There are several calculation methods each with their own positive and negative attributes, a few examples are listed below, to wit: 1. Surface Acreage Basis: simply calculating the production

attributable to a given tract based on the quantum of acreage of such tract divided by the total surface acreage of a “Production Unit”. Positives: (a) known calculation method (same method utilized for most pooled units); (b) simple calculations; and (c) maintains the same standard of measurement (acreage) so that ownership totals will equal 100%. Negatives: (a) would require expert testimony to a scientific level of exactness confirming that the entire reservoir under such tract is homogenous and isotropic, which is probably not achievable; (b) most likely fails to comply with the ruling in Browning Oil Co. v. Luecke; (c) most likely method to be attacked as “forced pooling”.

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2. Productive Horizontal Drainhole Length: by definition

productive horizontal drainhole length is the horizontal length of the wellbore path that begins at the first take point and runs along the surveyed wellbore path to the last take point. Calculations utilizing this method would consist of the numerator being the length (in feet) of the productive horizontal drainhole traversing the tract in question with the denominator being the total length (in feet) of productive horizontal drainhole. See Drafting Production Sharing Agreements, 39th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute, at 10, March 22, 2013, Robert D. Jowers and Mickey R. Olmstead. Positives: (a) in the author’s experience, the most utilized calculation method thereby moving closer to an “industry standard”; (b) comes closest to complying with the ruling in Browning Oil Co. v. Luecke; and (c) appears to be a fair and reasonable method of allocation, assuming supported by geological evidence. Id. Negatives: (a) whether this calculation method establishes “reasonable probability” necessitates expert testimony that the reservoir under such tract is “reasonably” homogenous and isotropic along the wellbore so each foot of wellbore can be expected to produce as much as any other foot of wellbore; and (b) utilizes different standards of measurement (number of feet v. acreage) so that ownership totals will not equal 100%.

3. Number of Perforations Along the Productive Horizontal Drainhole Length: this method of calculation is essentially the same as the “Productive Horizontal Drainhole Length” method listed as No. 2 above but incorporates the number of perforations along the portion of the wellbore under a given tract instead of using the number of feet the wellbore traverses under such tract. Here the numerator would be the number of perforations along the productive horizontal drainhole traversing the tract in question with the denominator being the total number of perforations along the total length of the productive horizontal drainhole. Positives: (a) likely a more accurate measure of the production attributable to a given tract than the “Productive Horizontal Drainhole Length” method; (b) also appears to be a fair and reasonable method of allocation, assuming supported by geological evidence (uniformity of the quality of perforations); and (c) appears to also satisfy the ruling in Browning Oil Co. v. Luecke.

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Negatives: (a) whether this calculation method establishes “reasonable probability” necessitates expert testimony that the perforations along the productive horizontal drainhole under a given tract are “reasonably” uniform so that each perforation can be expected to produce as much as any other perforation along the total length of the productive horizontal drainhole; (b) utilizes different standards of measurement (number of perforations v. acreage) so that ownership totals will not equal 100%.

Confusion of Goods. As previously mentioned, the Luecke Opinion failed to address: (A) What is “reasonable probability?”; (B) Who has burden of proof?; and (C) What is the measure of damages if “reasonable probability” cannot be ascertained? Indeed, the Lueckes, Browning Oil, and the Court did not raise the issue of commingling. Further, the author is unaware of any Texas appellate court case in which a Confusion of Goods argument was made in the context of a lessor challenging the allocation method of the lessee. The Doctrine of Confusion of Goods (commingling) provides that where goods of a similar nature and value owned by different parties are commingled so that a proper division among the owners as to their preexisting rights cannot be made the burden is on the one commingling the goods to properly identify the aliquot share of each owner; thus, if goods are so confused as to render the mixture incapable of proper division according to the pre-existing rights of the parties, the loss must fall on the one who occasioned the mixture. Humble Oil & Refining v. West, 508 S.W.2d 812, 818 (Tex. 1974). [emphasis added]. To meet this burden, the commingling party would have to show by a preponderance of the evidence and with reasonable certainty the amount of oil and gas produced from each of the tract penetrated by the horizontal wellbore. See Exxon Corp. v. West, 543 S.W.2d 667, 673 (Tex. Civ. App. —Houston [1st Dist.] 1976, writ ref’d n.r.e., cert. denied 434 U.S. 875); Humble Oil & Refining v. West, 508 S.W.2d 812, 819 (Tex. 1974). [emphasis added]. Failure to meet this burden would result in the owner in each of the separate tracts will be entitled to receive their ownership share in production from the total oil and gas produced from the well. Mooers v. Richardson Petro. Co., 204 S.W.2d 606, 608 (1947).

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Since the burden of proof shifts to the operator after proof by the tract owners of their ownership in an unpooled tract together with proof that they did not consent to the commingling of production in the horizontal wellbore, an important question to ask is whether the computation of the production allocable to each tract is capable of being established with reasonable certainty. See George A. Snell, III, Pooling Issues – From A to Horizontal, San Antonio Association of Professional Landmen, at 24, (March 12, 2012). [emphasis added]. While the Luecke Opinion did not address the Doctrine of Confusion of Goods, the Luecke Court did reject the Lueckes’ claims to recovery based on the doctrine utilized for vertical wells drilled on invalidly formed units. This doctrine entitles the lessors of the well site royalties on the full production from the well, rather than a share of production proportionate to the amount of acreage their tract has contributed to the Unit in which such tract is located. The Luecke Court opined: “…we recognize the immense benefits that have accompanied the advent of horizontal drilling, including the reduction of waste and the more efficient recovery of hydrocarbons. Draconian punitive damages for a lessee's failure to comply with applicable pooling provisions could result in the curtailment of horizontal drilling. We decline to apply legal principles appropriate to vertical wells that are so blatantly inappropriate to horizontal wells and would discourage the use of this promising technology. The better remedy is to allow the offended lessors to recover royalties as specified in the lease, compelling a determination of what production can be attributed to their tracts with reasonable probability.” Browning Oil Co. v. Luecke at 647. [emphasis added]. The rejection by the Luecke Court to apply traditional doctrines to measure damages suggests, but is by no means conclusive, that Texas Courts are willing consider the public policy implications of a given remedy. Therefore, it is possible, but again, not certain, that a Confusion of Goods argument would not be successful.

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Thank You! Should anyone have any questions, comments or concerns, please do not hesitate to contact me at [email protected].

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